- Morgan Stanley said that the MUNI market will post decent returns for 2022 and that debt issuance will fall due to the government stimulus. They are calling for moderate volitivity and, as a result, "opportunity" in the market from a retail and trading perspective. They are expecting sales to be down 11%-13% in 2022. I agree on this point based on everything we know at this time dealing with the stimulus package. Investors seek higher returns; however, they want to keep a significant portion in MUNI debt to offset any volatility they might see in other markets.
- Senator Bernie Sanders is working on proposed legislation to set an income threshold for an unlimited state and local tax deduction (SALT) while letting high earners continue to deduct $10K from their FED taxes. Sanders will aim to set the threshold at a level as high as possible, so it does not add to the deficit. This issue will not impact our markets too much. However, if the SALT cap remains at $10K for higher earners, this will incentivize buyers to buy tax-exempt paper to continue to build their MUNI portfolio. I suspect a compromise at some income threshold, and the SALT deductions will not change. This point should have a positive impact on the Fixed Income MUNI market.
- Bond buyers' demand for yields has fueled a surge in the sale of risky municipal bonds. These bond issues are sold with relatively high minimum investments, almost exclusively to institutional investors. So far this year, issuers have marketed $30.7B in bonds with a minimum denomination of $100M; this is a record. Most of these bonds are uninsured and lower-rated. The min denomination is designed to keep these bonds out of retail hands while paying about 3-5bps more than a standard bond with similar credit ratings. There will be plenty of this type of securities to choose from over the next week, some with min denominations of $500M as well. The DRL Group avoids such issues due to illiquidity.
- October retail sales figures show a substantial lift from online shopping. Retail sales advanced 1.7% in October, slightly more robust than the projection of 1.4%. Flat restaurant sales suggest that virus concerns have prompted consumers to channel more spending to online stores. Powell continues to promote "give this a year," and we will see where we are on inflation and sales. I tend to agree with this theory. A ton of pent-up demand will be in the system for at least a year. Inflation projections will continue to run "high" as we move into 2022.
- MTA plans to delay scheduled rate hikes for six months and suspend any potential service cuts indefinity. The agency will receive billions of dollars from the $1T deal signed into law. New York will receive $10.5B for transit infrastructure, with the bulk going to MTA to finance capital projects otherwise financed through bonds. This will be a common trend as we move through 2022.
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